Renfree Mines, Inc., owns the mining rights to a large tract of land in a mounta
ID: 2503860 • Letter: R
Question
Renfree Mines, Inc., owns the mining rights to a large tract of land in a mountainous area. The tract contains a mineral deposit that the company believes might be commercially attractive to mine and sell. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area: Cost of equipment required $ 970,000 Annual net cash receipts $ 355,000* Working capital required $ 250,000 Cost of road repairs in eleven years $ 71,000 Salvage value of equipment in twelve years $ 120,000 *Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth. The mineral deposit would be exhausted after twelve years of mining. At that point, the working capital would be released for reinvestment elsewhere. The companyExplanation / Answer
That's a Present Value of Irregular Cash Flows problem and I just happen to have an online financial Calculator for you and it has a fairly neat tutorial on how its done as well. And your answer is PV=$512,259.
To solve it you need to enter the cash flows on 4 lines as follows:
- first enter the interest rate of 15%. Then,
- On line 1 you have 1 payment of -1,075,000 (cost of equipment plus working capital. its negative, because this is cash outflow.)
- On line 2 you have 7 periods of cash returns of $305,000.
- On line 3 you have 1 period of $239,000 (8th year cash flow minus road repairs.)
- On line 4 you have 1 period of $730,000 (cash flow + salvage value + return of working capital.
- Then select cash flows at the BEGINNING of the period and hit calculate. Problem solved.